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Production externalities and two-way distortion in principal-multi-agent problems

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Lockwood, Ben (1999) Production externalities and two-way distortion in principal-multi-agent problems. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.527).

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Abstract

This paper studies an otherwise standard principal-agent problem with hidden information, but whether there are positive production externalities between agents: the output of any agent depends positively on the effort expended by the other agents. It is shown that the optimal contract for the principal exhibits two-way distortion: the effort of any agent is oversupplied (relative to the first-best) when his marginal cost effort is low, and undersupplied his marginal cost of effort is high. This pattern of distortion cannot otherwise arise in optimal single- or multi-agent incentive contracts, unless there are countervailing incentives. However, unlike the countervailing incentives case, the pattern of distortion is robust to the precise form of the externality.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HB Economic Theory

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Externalities (Economics), Production (Economic theory), Information asymmetry, Incentives in industry

Series Name:

Warwick economic research papers

Publisher:

University of Warwick, Department of Economics

Place of Publication:

Coventry

Official Date:

April 1999

Dates:

Date	Event
April 1999	Published

Number:

No.527

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

Description:

First version, August 1997; this version, April 1999

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